Buy Lupin: Edelweiss Research

Edelweiss Research is bullish on Lupin and has recommended buy rating on the stock. Broking house believes that the company is poised for an EPS CAGR of 29% over FY07-09E.

Edelweiss Research report on Lupin:

In Q4FY07, Lupin’s revenues, EBITDA, and net profit were at Rs 5,181 million, Rs 750 million, and Rs 1,371 million – Y-o-Y growth of 22.8%, 80.1%, and 173.2%, respectively. For the full year FY07, revenues increased 22.7% to Rs 19,709 million, EBITDA (at Rs 3,028 million) grew 42.0%, with a 50.0% growth in net profit (at Rs 3,021 million). Net profit for Q4FY07 and FY07 was higher, primarily on account Rs 1143 million income due to sale of IP assets to Servier for Perindopril.

Overall sales growth for Q4FY07 was driven by an increase in formulation sales in the developed and semi-regulated markets by 83% and 61%, respectively. For FY07, domestic formulations grew 24.2%, while formulations sales in the developed markets increased by 48%.

Further, the company has launched cefdinir on May 7, which has a patented market size of USD 800 million. As of now, there are four generic players (Sandoz, Teva and an authorised generic Dava) in the market. We believe this limited competition will persist for a while, giving a major boost to Lupin’s profitability in FY08E.

Overall, key growth drivers like the US generics and domestic formulations are growing at 20% plus with an improved growth visibility in FY08E. We have a positive outlook for FY08 based on: (1) key product launches like cefdinir with limited competition in the US, (2) continued good performance in domestic formulations and ROW formulations markets, and (3) likelihood of margin improvement.

At CMP of Rs 714, the stock trades at a P/E of 19.3x and 17.6x on our FY07E and FY08E, respectively. We reiterate our ‘BUY’ recommendation.

R&D: To provide upside triggers

Lupin received Rs 1143 million on sale of IP assets for Periondopril to Servier. The company is working on several such IP assets. It is also working on 4-5 NCE products, two of which will be in Phase III clinical trials in India in FY08E. The company might see some one-time upsides from monetising these R&D assets in future. We believe the company’s investment in R&D over the past few years is paying off and there could be some upside in the offing in the next 1-2 years.

Outlook and valuations

We believe Lupin, with its large basket of products, will sustain its growth in regulated markets. In addition, some of the company’s specialised products may give it significant upsides going forward, which will help improve margins. Further, Lupin’s growth in the domestic market is impressive, providing us comfort, given the company’s performance in this market is likely to be an important determinant of its success in future. On the basis of the aforementioned factors, we believe the company is poised for an EPS CAGR of 29% (adjusted for Perindopril income) over FY07-09E. At CMP of Rs 714, the stock trades at a P/E of 19.3x and 17.6x on our FY08E and FY09E, respectively.